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Costing Inventory through FIFO, LIFO and Weighted Average
Inventory
Once you have counted your inventory you need to value it. To do
this, most companies will
search for the Purchase Invoices to determine the unit prices
and develop the overall value by
multiplying the unit price by the quantity of the item you have
on hand. Companies can use
one of three ways to do this. They are:
First in, first out method (FIFO) - an inventory costing method
which assumes that the first
items placed in inventory are the first sold. Thus, the
inventory at the end of a year consists of
the goods most recently placed in inventory. FIFO is one method
used to determine Cost of
Goods Sold for a business. Examples that use this method would
be those dealing in the
hospitality or food retail business.
1. Enter the total number of units that you have on hand.
2. From the most recent purchase, November 22, enter the number
of units purchased, 8. In
some cases the number of units of the most recent purchase will
be greater or equal to the
total number of units on hand. In such a case, enter the total
number of units on hand and do
not complete step three below.
3. From the next most recent purchase, September 5, enter the
number of units, 10, needed for
the fifo units to equal the total number on hand, 18. Continue
with the next invoice if needed.
4. Multiply the unit price of each appropriate purchase by the
fifo units on hand to determine
the fifo cost.5. Add the individual costs to determine the fifo
cost of the total number of units in ending
inventory.
Last in first out (LIFO)-is an inventory valuation method which
assumes that the last items
placed in inventory are the first sold during an accounting
year. Thus, the inventory at the end
of a year consists of the goods placed in inventory at the
beginning of the year, rather than at
the end. LIFO is one method used to determineCost of Goods Sold
for a business.
http://biztaxlaw.about.com/od/glossaryc/a/costofgoodssold.htmhttp://biztaxlaw.about.com/od/glossaryc/a/costofgoodssold.htm
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1. Enter the total number of units that you have on hand, 18.2.
Enter the number of units in beginning inventory, 10. In some cases
the number of units of
beginning inventory will be greater than or equal to the total
number of units shown on hand.
In such a case enter the total number of units on hand and do
not complete steps 3 and 4
below.
3. From the earliest purchase, Febraury 16th, enter the number
of units purchased, 6.
4. From the next earliest purchase, April 17th, enter the number
of units,2, needed for the lifo
units to equal the total number of units on hand, 18.
5. Multiply the unit price of the beginning inventory by the
lifo units on hand to determine the
lifo cost of the beginning inventory. Repeat this process for
each appropriate purchase.
6. Add the lifo cost for the beginning inventory and each
appropriate purchase to determine
the lifo cost of the total number of units in ending
inventory.
**REMEMBER**In the lifo method, the latest purchase are assumed
to be sold first. Therefor
ending inventory consists of the units purchased the earliest
and the earliest purchase invoices
are used to determine the value of the ending inventory.
Weighted Average Inventory - The weighted average method is used
to assign the average
cost of production to a product. Weighted average costing is
commonly used in situations
where:
Inventory items are so intermingled that it is impossible to
assign a specific cost to anindividual unit.
The accounting system is not sufficiently sophisticated to track
FIFO or LIFO inventorylayers.
Inventory items are so commoditized (i.e., identical to each
other) that there is no wayto assign a cost to an individual
unit.
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1. Calculate the total cost of beginning inventory and each
purchase, $1020.00. by multiplying
the units by each unit price.
2. Calculate the weighted average price per unit, $20.40, by
dividing the total cost $1020 by the
number of units available, 50.
3. Calculate the cost of ending inventory, $367.20, by
multiplying the weighted average rpice
per unit, by the unit ending inventory, 18.
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Determining the Cost of Merchandise Inventory
Read pages 569-572 and answer the following questions.
1. When the FIFO Method is used, how is the cost of each kind of
ending inventorymerchandise inventory determined?
2. On what idea is the lifo method based?
3. In a period of rising prices, which inventory costing emthod
gives the highest cost ofmerchandise sold?
4. Why should a business select one inventory costing method and
usethat same methodcontinuously for each fiscal period?
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5. Define the following terms:
FIFO
LIFO
Weighted Average
Inventory Costing Method
FIFO
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LIFO
Weighted Average
